Page 123 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes 4.1.5 Geometric Model Building Approach

This is an approach to determine the precise relationship between the dependent and the
independent variables. In fact, econometrics is a discipline wherein application of mathematics
and statistical techniques is a part of economic theory. It presupposes the precise and clear
relationship between the dependent and independent variables and the onus of such well-
defined relationship with its attendant assumptions rests with the analyst. Thus, by geometrics,
the analyst is able to forecast a variable more precisely than by any other approach. But this
derived approach would be as good as the data inputs used and assumptions made.
Static Model Building or GNP Model Building or Sectoral Analysis is frequently used in particular
in the methods discussed earlier. These use national accounting framework in making short-
term forecasts. The various steps while using this approach are:
1. Hypothesize the total demand in the economy as measured by its total income (GNP)
based on likely conditions in the country like war, peace, political instability, economic
changes, level and rate of inflation etc.
2. Forecast the GNP figure by estimating the levels of its various components like:

(a) Consumption expenditure
(b) Private cosmetic investment
(c) Government purchases of goods and services

(d) Net exports
3. Forecasting the individual components of GNP, the analysis then adds them up to obtain
a figure of the GNP.

4. The analyst compares the total of GNP and arrives at an independent estimate appropriately.
The forecast of GNP is an overall forecast for internal consistency. This is done to ensure
that both his total forecast and permanent forecast make sense and fit together in a
reasonable manner.
5. Thus the GNP model building involves all the details described above with a considerable
amount of judgment.

Task What do you think has accounted for this suddenly revived economy?
Support your answer with reasons.

Future Scenario

The scenario could emerge strongly bullish if the cut in costs in implementing the finished
product is accompanied by a cut in the import tariff for the raw materials as well. Besides, the
excise component would have to be lowered as well, resulting in an expansion of demand
within the economy. Once this transpires, more goods will be sold, recession will history and if
installed capacities fail to meeting the demand, we could even have a temporary shortage in
certain areas on our hands.
Given this scenario, only the obstinate would continue to be bearish. It is time perhaps, to
overcome the current shorts on the Sensex and place and place all our big chips on the shares of
polyesters companies. Stock polyester, Sanghi Polyster, Sanghi Polyster and Haryana Petro
look cheap when viewed against projected 1993-94 earnings. With the festive season under way,

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